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Global stocks Shares

Magellan Financial Group – rand to Attract More Funds

While we don’t believe it will be immune from the structural trends of investors moving to passive investments, continuing fierce competition in the active manager industry and major institutions in-housing some of their asset management, we believe it’s better placed than most active managers to address these headwinds. We also think it’s well position to take advantage from Australia’s growing pool of self-managed superannuation funds that still have a relatively low allocation to global equities. However, continued strong Performance will remain key.

Key Considerations

  • Magellan Financial Group has a high-profile brand. Increasing superannuation balances supported by Australia’s ageing demographic and compulsory superannuation should expand demand for global exposure, and we believe Magellan is well placed to serve growing retail investor demand.
  • Its established presence in the much larger U.S. and U. K. markets gives Magellan further growth opportunities.
  • A strong balance sheet, operating leverage, low capital demands, and strong free cash flow generation supports a high dividend payout ratio and offers investors the best of both growth and income return.
  • A strong long-term track record in international equities allows Magellan to charge investors a premium management fee and has established the firm as a leader in Australia’s wealth-management industry. Continued strong investment performance of flagship funds should support funds flow.
  • Magellan is well managed and benefits from strong long-term growth prospects resulting from increasing numbers of investors seeking to diversify exposure to international equities with a long-term, high-quality stock focus.
  • Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. give it a stronger growth profile than most domestic peers.
  • The majority of Magellan’s earnings come from a few large funds, meaning it has a high reliance on key investment personnel and the performance of its main funds. Should these personnel leave, or should its main funds underperform for a sustained period, fund outflow could increase to material levels.
  • There is increasing competition from other active international equity managers and new international equity funds from incumbents.
  • The firm faces fee pressure from the increasing popularity of lower-cost alternatives, such as index type products and ETFs.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Small Cap

O’Reilly Starts 2021 Strong as Sales and Profitability Move Sharply Higher, but Shares Seem Rich

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

We suspect near-term volatility will remain high (stemming from the pandemic and lapping increasingly difficult comparable growth through 2021), but our long-term targets are still mid-single-digit top-line growth and roughly 20% adjusted operating margins on average over the next 10 years. In our view, O’Reilly remains the strongest of the auto-parts retailers we cover, but we suggest investors await an entry point that affords more of a margin of safety.

Management updated its 2021 guidance, now calling for $24.75-$24.95 in diluted EPS based on a 19.9%-20.4% operating margin (previously $22.70-$22.90 and 19.0%-19.5%, respectively). The exceptional start to 2021 will lead our prior targets higher (from 19.4% and $23.67, respectively), likely toward the top end of each range. Weather and stimulus effects contributed to the brisk sales, as a cold winter spurred vehicle repair needs and customers found themselves with more funds that could be directed toward keeping their cars and trucks on the road and maintained. With vehicle miles driven recovering but still around 10% lower than year-ago marks (as of February, the latest data available from the Federal Highway Administration), we suspect demand will remain robust. We are encouraged that O’Reilly saw strength in its do-ityourself and professional segments; although the former sector drove growth for much of 2020, we expect the latter to maintain momentum as rising vaccination rates lead more Americans who had the option of working from home back to the office. Although this creates some margin pressure (the DIY segment is more lucrative), cost leverage should be a powerful offset, and the professional sector should remain the industry’s long-term growth engine.

Capital Allocation

O’Reilly’s balance sheet remains hearty despite its footprint growth, with modest near-term debt maturities and an appropriate level of indebtedness. Management targets adjusted debt to be 2.5 times adjusted EBITDAR, with the company’s strong performance leading O’Reilly to undershoot that level for the past several years (most recently 2020, when it posted a 1.9 mark). Under CEO Greg Johnson (and his predecessor, Gregory Henslee, who retired in 2018), leadership has prudently prioritized maintaining investment-grade credit ratings, helping to ensure flexibility and continued attractive inventory financing terms.

The firm’s investment approach is noteworthy, as O’Reilly has done well to invest in expanding its store network (and associated cost leverage) while maintaining a top notch distribution infrastructure that is essential to providing industry-leading service levels. This high standard of part availability draws professional and DIY customers and is difficult for rivals to replicate. The company’s recent acquisition of Mayasa Auto Parts in Mexico should mark the start of increasing investments in the new market, but O’Reilly’s successful approach to domestic store network expansion gives us confidence that the firm will act prudently.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

The Pinnacle at Backing and Growing the Right Horses

This allows Pinnacle to benefit from earnings upside as its affiliate boutiques grow in scale and realise operating leverage. A well-known brand and extensive diversification (across managers, asset classes and client cohorts) strengthen Pinnacle’s ability to attract and hold on to FUM across market cycles. Regardless, capital intensity is higher than pure-play asset managers. Dilution from capital raisings, increasing leverage and deploying capital at low rates of return are risks.

Key Investment Considerations

  • Pinnacle’s reputation as a quality growth partner for high performing boutique managers helps attract high calibre asset managers and investors seeking varied investment solutions. Diversity in asset classes, boutiques, and client cohorts provide stability in FUM growth across market cycles.
  • We anticipate ongoing growth in demand for Pinnacle’s solutions due to the increasingly competitive and regulated funds management landscape.
  • Earnings prospects are strong. Notably, there are upsides from the scaling of fixed costs as affiliate boutiques grow in scale, new money from increased distribution and new boutique additions.

Company Profile

Pinnacle Investment Management Group is an Australian-based multi-affiliate investment management firm. The principal activities of the firm are equity, seed capital and working capital, and providing distribution services, business support, and responsible entity services to a network of boutique asset managers, termed as “affiliates.” Apart from deriving revenue from its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. The business is growing rapidly with number of boutiques and FUM more than doubling to 16 and circa AUD 71 billion in December 2020, respectively, from seven and AUD 23 billion in December 2016.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Technology Stocks

Veeva Raises Annual Guidance after First-Quarter Revenue Beat

Commercial Cloud results also benefited from adoption of CRM add-ons, which we see as the fundamental driver of long-term growth for the suite. Vault had a very strong quarter as well, bolstered by its Development Cloud that is composed of an end-to-end stack of modules that integrates different components of the drug development process (clinical, quality, regulatory, safety). The company added a record number of new customers to its Vault Quality suite of offerings. Vault Regulatory and Vault Safety also performed well, adding new customers and expanding adoption of modules among existing customers.

Professional services revenue grew an impressive 38% year over year and despite only composing one fifth of total revenue, contributed to more than half of Veeva’s revenue beat, as demand for Vault R&D services and business consulting was higher than anticipated during the quarter. Management expects service revenue to normalize in the second quarter, as it attributes higher utilization of services to the timing of client project starts. Ultimately, services revenue is more volatile than subscription revenue due to its nature (ad hoc versus SaaS), and we are maintaining our long-term revenue growth estimates for the segment.

Veeva anticipates momentum to carry through the rest of the year and has raised total revenue guidance to a range of $1,815 million-$1,825 million (an increase of $60 million over last quarter’s estimates). Taking this raise into account along with a slight improvement in our short-term operating margin estimates, we are raising our fair value estimate to $305 from $300.

Company Profile

Veeva is a leading supplier of software solutions for the life sciences industry. The company’s best-of-breed offering addresses operating and regulatory requirements for customers ranging from small, emerging biotechnology companies to departments of global pharmaceutical manufacturers. The company leverages its domain expertise and cloud-based platform to improve the efficiency and compliance of the underserved life sciences industry, displacing large, highly customized and dated enterprise resource planning, or ERP, systems that have limited flexibility. As the vertical leader, Veeva innovates, increases wallet share at existing customers, and expands into other industries with similar regulations, protocols, and procedures, such as consumer goods, chemicals, and cosmetics.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

The Descartes Systems Group Inc

Descartes’ Global Logistics Network is a more modern approach to electronic data interchange, or EDI, that ties together the disparate software systems of many connected parties. In doing so, the platform modernizes the model, which consists of a variety of different data formats that were not necessarily compatible. The GLN also provides deeper intelligence than EDI was capable of. This is especially important as shipping regulations become increasingly complex in a global supply chain.

With so many connected parties on the network, Descartes has a captive audience for its software portfolio. Over time, the firm has developed solid positions in niche markets, mainly for customs and regulatory compliance. We also view both the trade management modules and the broker and forwarder enterprise systems as better positioned competitively, with routing, mobile, and telematics operating in a more competitive niche. E-commerce has also become an important pillar of the business, especially during the COVID-19 pandemic. While the network and software modules are sticky separately, we think they are stronger together, as the firm enjoys strong retention rates of 95%.

Descartes relies on acquisitions to expand its software portfolio and help drive growth. Since 2014, the company has completed 25 acquisitions for $840 million in aggregate. Management is focused on areas that fill holes across the portfolio and functionality that customers request. This strategy has been executed consistently over more than a decade now. We think acquisitions drive approximately half of the company’s growth, and we expect several small deals each year. We see acquisition opportunities as abundant in this highly fragmented $15 billion market.

Bulls Say

  • Descartes operates the largest neutral shipping network, connecting parties across air, land, and sea transportation modes.
  • The company enjoys a growing portfolio of software solutions that address challenges specific to the shipping, supply chain, and logistics industries.
  • Increasing globalization of the supply chain drives increasing complexity, which benefits Descartes.

Bears Say

  • Descartes’ acquisition model makes organic performance impossible to parse out and makes ROICs look worse. Acquisitions may also increase costs, distract management with integration issues, and increase the risk of overpayment.
  • Instead of more traditional guidance, the company offers “baseline calibration,” which is a view of what revenue and adjusted EBITDA will be in the quarter if no additional customers are signed and no acquisitions are made.
  • Ultimately, Descartes is competing with the major ERP vendors.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Medibank Private Ltd

We now assume Medibank can grow policyholders around 3% per year out to fiscal 2025, compared with around 2% previously. With the market estimated to grow at 1% per year, this reflects our expectation that Medibank’s market share edges up to 30% by fiscal 2025 from an estimated 27.2% currently

In the first nine months of fiscal 2021, industry policyholders have grown around 2.5%, or by 166,000, to 6.9 million. In other words, around 18,500 new policyholders a month. Medibank has averaged policyholder growth of around 6,100 per month over the first 10 months of fiscal 2021. This implies Medibank is winning 33% of new policyholders, higher than its existing share of the market. We have increased our fiscal 2021 policyholder forecasts to 4% from 3%, this is in line with Medibank fiscal 2021 guidance to grow policyholder numbers by 3.5% to 4%. Our fiscal 2021 dividend is at the top end of management’s 75%-85% target range.

Medibank being a large and more profitable insurer is able to spend more on marketing and has greater brand awareness than many competitors, hence is more likely to attract new to industry joiners. We also believe Medibank’s advertising of in-home care resonated with the public, especially at a time where aversion to hospital stays increased. Reducing the number of days a patient spends in hospital should prove to be cheaper for the insurer, meaning a slight benefit to average claims paid per policyholder. Medibank also has in-house healthcare and telehealth services, which we believe support better customer outcomes. These factors, along with Medibank benefitting from scale benefits in hospital contracting and claims integrity, provide the insurer sustainable competitive advantages, which underpin our narrow moat rating.

Profile

Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.7 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

AusNet Services Ltd

Revenue is highly secure and predictable between regulatory resets, being close to 90% regulated. Less-favourable regulatory conditions pose headwinds to earnings and distributions.

  • The tougher regulatory environment is a headwind. Earnings are expected to remain subdued in coming years following less generous regulatory resets, though a cost efficiency program should help.
  • The soft economy and high energy utility bills are pressuring the regulator to cut network returns to protect households as much as possible. The environment is likely to remain tough for the foreseeable future.
  • Financial position and distribution policy are relatively conservative, positioning the company well to withstand the tough environment.

AusNet Services owns three regulated energy networks in Victoria: the state’s main high-voltage electricity transmission network; an electricity distribution network; and a gas distribution network. It also owns minor unregulated assets and a third-party asset management business. We like the secure cash flow, solid balance sheet, and full ownership of underlying assets. However, medium-term earnings face major headwinds as the regulator cuts returns to protect households and businesses from high and growing energy bills. AusNet is considered to have no moat, as sustainable excess returns are unlikely, given regular resets and the tough regulatory environment.

Around 85% of AusNet’s revenue is regulated, offering predictable and secure cash flow between regulatory resets. These assets are subject to review by the Australian Energy Regulator, usually every five years. The regulator sets tariffs to provide a fair return for investors after covering forecast costs. AusNet received favourable regulatory decisions for its electricity transmission and distribution assets in past years, including the Advanced Metering Infrastructure program. However, more recent regulatory decisions were relatively unfavorable. We expect future resets will be even tougher, given the soft economy and high energy bills, a key risk for all regulated utilities. Household gas and electricity bills have doubled in the past 10 years because of higher fuel prices, expensive network modernization and government policies to promote green energy.

Long-term government bond yields are a key determinant of regulatory returns, affecting both the cost of debt and the cost of equity allowances. As bond yields have fallen sharply in recent years, regulatory returns have fallen in sympathy. Additionally, rules were changed to give the regulator more power in reducing allowances for other costs. Staggered resets smooth the impact, but all assets will likely generate lower returns in coming years. The electricity distribution network resets in early 2021, the electricity transmission network resets in early 2022, and the gas distribution network resets in early 2023.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Harvey Norman Holdings Ltd– Overestimating Upside

Yet, these factors are unlikely to alter the long-term outlook for most retailers. Rather, we expect consumer spending growth will prove relatively weak, while shifts between categories and sales channels could test retailers in the medium term.

The S&P/ASX 200 Consumer Discretionary index has rebounded by some 75% since the recent lows on March 23, 2020, after it collapsed by 45% in just over a month amidst the global equity rout. The discretionary retailing sector was initially much more severely hit than the overall market. In the past, discretionary spending has proven to be procyclical and it was singled out as highly exposed to the impending recession and widespread shutdowns, with these risks further exaggerated by supply chain concerns.

However, unlike the overall domestic equities market, the S&P/ASX 200 Consumer Discretionary index has nearly fully recovered and is just 3% shy of its February 2020 highs. In contrast, the broader Australian market is still down 13% versus its all-time February highs. While our discretionary retailing coverage screened as materially undervalued in March 2020, when we identified Myer, Super Retail and Premier as 5-star investment opportunities, the pendulum has now swung too far the other way.

However, this growth was unevenly distributed because of various restrictions on mobility and gatherings introduced either by federal and state governments or self-imposed by health-conscious consumers. The travel and restaurant industries, as well as fashion retailers, have been amongst the most impacted as consumers redirected their spending to other categories. Clear winners have been liquor, hardware and consumer electronics and home appliances retailers

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Insurance Australia Group – Unexpectedly Large Provision

There is continual pressure from competition on revenue and margins, with premium rate increases generally only covering recent claims inflation. Large insured events occur without warning, and claims trends are largely beyond management’s control in the short term. Reinsurance protection and quota share agreements do help mitigate risks but come at a cost and mean profit sharing. In addition to more-stable fee-based income, quota share deals have the added benefit of releasing capital. We agree with management’s decision to exit Asia with a focus on profitability in its core markets.

Key Investment Consideration

  • Insurance Australia Group, or IAG, is a custodian of well-known brands in Australia and New Zealand. Despite its size and market share, competitors with low-cost digital strategies, or a focus on select regions or products, prevent IAG from exerting pricing power one would expect with its associated scale.
  • The strategic relationship with Berkshire Hathaway reduces uncertainty and IAG shareholders should benefit with less volatile earnings and dividends.
  • Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but competitors have shown these are not insurmountable barriers.
  • Insurance Australia Group is a general insurer with around AUD 12 billion of annual gross written premiums, operating in Australia and New Zealand. Stakes in a Malaysian and Vietnamese insurer are the only remaining remnants of an abandoned Asia growth strategy. Insurance Australia Group is a custodian of well-known heritage brands which include NRMA, CGU, SGIO, SGIC, Swann Insurance in Australia and State, NZI, AMI, Lumley in New Zealand.
  • The firm’s underwriting discipline, productivity initiatives, and focus on profitable growth, will see returns consistently return its cost of capital.
  • IAG has collectively removed downside risk from 32.5% of its business while retaining exposure to earnings upside via profit share arrangements.
  • A benign claims environment with a lower incidence of major catastrophes considerably boost underwriting profits.
  • A strong balance sheet and good earnings momentum will see consistent dividend growth and surplus capital returned to shareholders.
  • Competition increases and wins market share from incumbents, such as IAG, by offering lower premiums, regardless of the impact on short-term profits and returns.
  • The Asian growth strategy was disappointing, and we endorse the recent sale of operations in Thailand, Indonesia, and India.
  • A higher incidence of large claims events from major catastrophes will reduce profitability to the extent dividends are cut materially and the insurer needs to raise capital.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

InvoCare Ltd– Earnings

The number of deaths is highly predictable, creating a reliable revenue source. Historically, growth has been driven by price increases, growth in the number of deaths, small organic market share gains, and a boost from acquisitions of small private businesses at relatively low prices. Nonetheless, year-on-year variations in the death rate can cause some short-term earnings volatility. InvoCare typically trades on a high forward price/earnings ratio; however, we believe a premium valuation is justified, given the stable, growing revenue and returns consistently above its cost of capital.

Key Investment Considerations

  • InvoCare usually trades at a high price/earnings ratio, reflecting defensive earnings, strong cash flow generation, and a high dividend payout ratio.
  • Fluctuations in the number of deaths per year and changing product mix dynamics can result in volatility of underlying earnings.
  • The increased reinvestment in the business should support margin improvement while ensuring the business is well placed to capitalise on rising death rates.
  • InvoCare is the largest provider of funeral, cemetery, and crematorium services in Australia, New Zealand, and Singapore. It has a number of well-known, highly respected brands and significant market shares that underpin our
  • wide economic moat rating. InvoCare has a history of resilient and rising revenue and earnings, free cash flow and dividend-per-share growth. The company consistently generates returns above its cost of capital.
  • Steady growth in the number of deaths underpins our positive long-term view on InvoCare’s earnings outlook. Growth in the number of deaths has averaged about 1% in Australia and in New Zealand over the past 60 years. The latest estimates from the Australian Bureau of Statistics and Statistics New Zealand project the annual growth in the number of deaths to increase progressively and peak at around 2.8% in Australia and 2.3% in New Zealand by 2034, before slowing back to around 1% by 2055.
  • InvoCare consistently generates return on invested capital above its weighted average cost of capital, reflective of its market position, reputation, and strong brand equity.
  • Steadily growing industry volumes are relatively immune to economic factors and will accelerate as the population increases.
  • InvoCare faces no significant national competitors in Australia. This relative market strength and InvoCare’s participation in the slow consolidation of the industry should deliver high-quality earnings.
  • Beyond brand management, reputation risk in particular is high, given the importance of personal recommendations to winning new business.
  • Advances in medicine and changes to assumptions for life expectancy, coupled with changes in assumptions regarding birth and death rates, could negatively affect expected cash flows.
  • An extended economic downturn could see more price-sensitive customers spend less on funerals.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.